Overview: Sentiment is unhinged. It has swung
from fears that the Fed is behind the inflation curve and unemployment is below
the long-term equilibrium rate to the central bank is going to kill the economy by
raising rates and allowing the balance sheet to shrink too quickly. Today's US
data for retail sales and industrial output may play on such fears. Both are
expected to have slowed sequentially (retail sales may fall outright even when
the dismal auto sales and gasoline are excluded). NASDAQ snapped a
three-day advance, and its 2.5% slide retraced the gains of the past two
sessions. The US 10-year yield weathered the CPI and Fed rhetoric, and
after probing 1.80% to start the week, slipped to almost 1.69% yesterday. Asia Pacific and European equities are lower today. Japan, South
Korea, and Australian markets lost more than 1%, and the regional index pared
this week's gains. Europe's Stoxx 600 is nearly flat on the week coming into today
and is off about 0.6% near midday in Europe. US futures are little
changed. Bond yields are firmer, with the US benchmark yield near 1.75%,
leaving it a couple basis points lower on the week. European yields are 2-3 bp higher today, but off mostly 3-5 bp on the week. Of note, Japan's
five-year yield is approaching zero to reach its highest level since
2016. Led by the Norwegian krone and Canadian dollar, most major
foreign currencies are stronger, with the minor losses of the Antipodeans being
the exception. For the week, the euro's 0.9% gain is the least among the
majors. Most emerging market currencies are firmer, with India bucking
the move. The JP Morgan Emerging Market Currency Index is edging higher
but looks set to post its first back-to-back weekly gain since last
August-September. Gold is little changed around $1823, which puts it nearly 1.5% higher for the week. Oil has pushed to marginal new highs (~$83.20) Iron ore
is off around 1% for the second session to give back this week's gains plus
0.5%. Copper is trading off for the second day, but is up around 2.6%
for the week, its best showing since mid-October. After jumping more than
22% in the first three sessions this week, US natgas prices fell 12.1%
yesterday and are off another 2.5% today. Net-net, it is up about 6.4%
this week on top of last week's 5% advance. Europe's benchmark continues
to be volatile but was flat for the week coming into today, where it is rising by
around 7.3%.
Asia Pacific
China's trade surplus soared
last month. Exports
were stronger than expected and imports weaker. The surplus reached
almost $94.5 bln. Economists (median in Bloomberg's survey) expected a
little less than $74 bln. They had expected the surplus to fall in yuan terms,
but it did not. In dollar terms, exports rose 20.9% year-over-year (to
$340.5 bln), slower than November, but stronger than expected. Imports
rose by 19.5% (~$246 bln) after November's 31.7% rise. Economists had
projected 27.8% gains. Last year, China recorded a $676 bln
surplus. Exports of steel and aluminum remained strong. Consumption
goods shipments showed strong increases (e.g., toys 23.6%, shoes 29.3%).
In real terms, the import of oil rose 19.9% last year and copper imports
increased by 15%. Imports of iron ore declined year-over-year in
December.
Exports to the US rose 21.2%
year-over-year in the last month, while imports rose 3.3% to produce a $39.2 bln
surplus. Exports
to the EU rose 25.6%, while imports fell by nearly 3%. The bilateral
trade surplus stood at $25.1 bln. China's shipments to ASEAN rose 12%,
but its imports fell 22.5%. China's trade was more balanced with
Australia. Exports for almost 20% while imports rose by 19.5%.
Note the Regional Comprehensive Economic Partnership, the ASEAN, China,
Japan, South Korea, Australia, and New Zealand trade pact was officially
launched January 1. It will eventually eliminate tariffs on 90% of the
goods trade.
As widely anticipated, South
Korea's central bank delivered its third rate hike since last July. The 25 bp increase brings the 7-day
repo rate to 1.25%. The swaps market has 75 bp of tightening discounted
for the rest of the year. Consumer inflation rose 3.7% year-over-year in
December (2.7%) core rate. The economy expanded by 0.3%
quarter-over-quarter in Q3 and is expected to have accelerated to around 1% in
Q4 (due January 24). Separately, and with little market impact, North
Korea appears to have conducted its third missile test of the year.
After setting multi-year
highs in the first few days of 2022 trading, the dollar reversed hard against
the yen. It
reached JPY116.35 on January 4. It has been sold every day since but one
and today reached a low of about JPY113.65. We fell for what has turned
out to be a false breakout. The JPY113.60 area corresponds to the (38.2%)
retracement of the dollar's rally that began in late September around the FOMC
meeting. A break signals a test on the JPY112.70-JPY113.00 area. On
the upside, JPY114.25-JPY114.50 offers the first hurdle. The
Australian dollar peaked yesterday near $0.7315, its best level since
mid-November but gave the gains up by the close. It has come back
offered today to pare its weekly gain. Around $0.7270, it is up around 1.25%
for the week. Initial support is seen in the $0.7250-$0.7260
area. The booming trade surplus and broad US dollar weakness is
making it difficult for the PBOC to resist yuan gains. The dollar
fell to just above CNY6.34 today to match the year-end spike. It is still
trading below CNY6.35, where the central bank seemed to want it above.
State-owned banks (redundancy?) were seen buying dollars near the end of the
mainland session. The PBOC set the dollar's reference rate at
CNY6.3677. The Bloomberg survey found a median projection of
CNY6.3662.
Europe
The UK economy expanded by
0.9% in November, twice what economists projected, and October's expansion was
revised to 0.2% from 0.1%. This leaves the UK economy about 0.7% larger than it was on the
eve of the pandemic. The details were strong with a 1% gain in industrial
production and a 0.7% increase in services, but better than anticipated.
The overall trade balance remains in surplus for the second month (GBP626 mln
after GBP151 mln in October). The market continues to expect (~88%) of a
25 bp hike at next month's MPC meeting on February 3. The swaps market
has four hikes discounted for this year.
Germany became the first G7
country to report 2021 GDP. It grew 2.7%, in line with expectations. Few details
were announced with this preliminary estimate. However, the Federal
Statistics Office warned that Europe's largest economy may have contracted
between 0.5% and 1% in Q4. This would leave the German economy around 2%
smaller than it was before the pandemic struck and appears to have lagged the
other large eurozone countries. There is some risk that the German
economy contracts this quarter as well.
Of course, the US will not
recognize a Russian sphere of influence in eastern and central
Europe. It was
never a realistic possibility. It is like free trade, which often means
in practice that the other should reduce their trade barriers. The more
critical issue is whether the US will defend its sphere of influence in South
America and the Caribbean. Russia made pointed comments about possibly
putting troops in Cuba or Venezuela? We have already noted that
China's Belt Road Initiative is finding a more receptive audience in Jamaica
and Barbados. Do not forget that the Cuban Missile Crisis nearly 60 years
ago was resolved by the Soviet Union pulling its missiles out of Cuba and the
US pulling its missiles out of Turkey. If the US does not recognize
Russia's sphere of influence (or China's) why should they respect
America's?
Meanwhile, the Russian ruble
has been sold.
Since the start of the year it has rivaled the Turkish lira for the
dubious distinction of weakest emerging market currency, off almost 1.7% with
today's small gain. The price of insurance against a sovereign default
has doubled since late October and has risen by a third this year (to about
1.65%). There had been some hope that Russian inflation was near a peak
as the central bank doubled the key rate last year to 8.5%. The year-over-year
CPI slipped ever so slightly in December (8.39% from 8.40%). Ruble
weakness could boost price pressures, forcing the central bank to extend the
tightening cycle and slow growth. The World Bank's new projections put
Russian growth at 3% this year, and the market (Bloomberg median) is at
2.6%.
The euro took out
yesterday's high by 1/100 of a penny, according to Bloomberg data, to reach
$1.1483. The
market seems hesitant about extending the gains ahead of the weekend, perhaps
given the geopolitical backdrop. But the intraday momentum indicators suggest
the North American market may have another go. Initial support is seen in
the $1.1440-$1.1450 area. If it closes above $1.1455, it would be the fourth
consecutive advance. Barring a dramatic reversal, it will be the third weekly gain
in four weeks. Despite the robust November GDP figures, sterling
has held below yesterday's high of almost $1.3750. It is still
there and hovering around the 200-day moving average (~$1.3735). The next
upside target is the $1.3800-$1.3840 area, the last high from October. The intraday momentum indicator seems consistent with consolidation ahead
of the weekend.
America
There are three US issues
for investors to consider today. First, the White House has indicated its three nominations
for the Federal Reserve Board of Governors: Raskin, Cook, and
Jefferson. All have been discussed in the press, so there is no surprise. We are more reluctant than others in projecting how they will
vote. Being hawkish or dovish is very contextual, as we have seen with many
of the current members. It is clearer now than it was a couple of weeks
ago that to preserve the flexibility for four (or more) hikes this year, the
Fed must start early and that means a March hike.
The second consideration is
the economic data. December retail sales and industrial production are the
highlights. Import/export
prices and the preliminary University of Michigan consumer confidence and
inflation expectations are also due. The surging virus likely weighed on
activity and the Beige Book hinted at this. Monthly changes in
retail sales last year ranged from -2.9% to +11.3%. The average (1.7%)
and median (4.2%) are misleading. In any event, a small decline in the
headline and ex-auto/gasoline measure is likely. Monthly industrial
output ranges from around -3% to +2.8%. It is expected to have edged up
by 0.2% after a 0.5% rise in November. Note that the capacity utilization
rate is forecast to rise to 77%. It stood around 76.5% at the end of
2019. The third consideration are the large bank earnings (JP Morgan,
Wells Fargo, and Citibank). Bank earnings, like US corporate profits
more broadly had a strong year. With rising interest rates, many see the
bank shares outperforming this year.
After falling to CAD1.2455
yesterday, the greenback bounced back to close at new session highs near
CAD1.2520.
Follow-through buying was limited to the CAD1.2525 area before dollar sellers
reemerged. There are two sets of large options expiring today. The
first is for $1.38 bln at CAD1.2500 and the other is at CAD1.2525 for $1.42
bln. The US dollar traded below its lower Bollinger Band for the past two
sessions but is holding above it so far today (~CAD1.2470). Consolidation
is likely the flavor of the day. The greenback traded quietly against
the Mexican peso this week but made a new low near MXN20.28 earlier today, its
lowest level since late October. The 200-day moving average is found
slightly lower (~MXN20.2780). It has been recording lower highs since
Monday's peak near MXN20.5230. Today is the sixth session that the dollar
has taken out the previous session's low.
Disclaimer
Reviewed by Marc Chandler
on
January 14, 2022
Rating:
